State ex rel. Miller v. Gannett Outdoor Co. of Arizona, Inc.

• Decision Date: 14 June 1990
• Docket Number: CA-CV,No. 1,1
• Citation: 164 Ariz. 578,795 P.2d 221
• Parties: STATE of Arizona, ex rel., Charles L. MILLER, Director, Department of Transportation, Plaintiff-Appellee, v. GANNETT OUTDOOR COMPANY OF ARIZONA, INC., a Delaware corporation, Defendant-Appellant. 88-506.
• Court: Arizona Court of Appeals

Page 221

795 P.2d 221

164 Ariz. 578

STATE of Arizona, ex rel., Charles L. MILLER, Director, Department of Transportation, Plaintiff-Appellee, v. GANNETT OUTDOOR COMPANY OF ARIZONA, INC., a Delaware corporation, Defendant-Appellant.

No. 1 CA-CV 88-506.

Court of Appeals of Arizona,

Division 1, Department B.

June 14, 1990.

Reconsideration Denied Aug. 9, 1990.

[164 Ariz. 579] Robert K. Corbin, Atty. Gen. by Graham A. Turner, Asst. Atty. Gen., Phoenix, for plaintiff-appellee.

Eaton, Lieberman & Dodge, Ltd. by David D. Dodge, Susan G. Sendrow, Phoenix, for defendant-appellant.

OPINION

VOSS, Presiding Judge.

The sole issue on appeal is whether a lessee's expectation of continued lease renewals is a compensable property interest when the underlying land is taken by the state. For the reasons below, we affirm the trial court's finding that it is not compensable.

Background

The facts are undisputed. Pursuant to a written agreement, appellant Gannett Outdoor Company of Arizona (Gannett) leased property from the Salt River Project Agricultural Improvement & Power District (SRP), on which Gannett maintained a sign structure. The original lease term was for three years ending September 30, 1983. Paragraph 5 of the lease provides:

5. After the term hereof, this agreement shall continue in force from year to year, unless terminated at the end of such term, or any additional year thereof, upon a written notice of termination by either party, served not less than thirty days before the end of such term or additional year.

Paragraph 5 clearly allows either party to terminate the year to year lease subject only to the notice provision. This availability of non-renewal notwithstanding, the lease extended from year to year after the expiration of the original term.

On September 19, 1986, the state filed a complaint in condemnation seeking possession of the leased premises as well as Gannett's sign structure. The parties agreed to the value of the sign and, therefore, this case does not involve valuing improvements. However, a dispute remained concerning the value of the leasehold, specifically, whether Gannett was entitled to compensation beyond the value of the unexpired lease term. The state moved for partial summary judgment, arguing that Gannett was not entitled to compensation for the anticipated renewal of the lease. Gannett opposed the motion relying on undisputed testimony that the lease would be renewed. The trial court granted summary judgment in favor of the state. Formal judgment was entered August 29, 1988, and this appeal followed.

Discussion

Both the United States and the Arizona Constitutions provide that the state must provide just compensation for the taking of private property. U.S. Const. Amend. V; Ariz. Const. art. 2, § 17. ¹ Preliminarily we note that a lessee is entitled to compensation for the unexpired term of his lease. Alamo Land & Cattle Co. v. Arizona, 424 U.S. 295, 303, 96 S.Ct. 910, 916, 47 L.Ed.2d 1 (1976). Likewise we note that a lease term containing an unconditional right to renew in favor of the lessee may constitute a legally compensable interest. See State ex rel. Morrison v. Carlson, 83 Ariz. 363, 365, 321 P.2d 1025, 1027 (1958) (unconditional right of renewal compensable element where facts demonstrated likelihood that lessee would exercise right). Here, however, we must decide whether a lessee's mere expectancy of continued lease renewals is sufficient to require compensation. ²

The federal courts have held that an expectancy in the continuation of a lease does not constitute a compensable property interest. In United States v. Petty Motor Co., 327 U.S. 372, 66 S.Ct. 596, 90 L.Ed. 729 (1946), the Supreme Court held that "[t]he fact that some tenants had occupied their leaseholds by mutual consent for long periods of years does not add to their rights." Id. at 380 n. 9, 66 S.Ct. at 601 n. 9. The Petty Motor Court cited with approval Emery v. Boston Terminal Co., 178 Mass. 172, 59 N.E. 763 (1901), in which Holmes, C.J., set forth his often quoted statement regarding the non-compensability of a lessee's expectation in the continuation of his tenancy:

It appeared that the owners had been in the habit of renewing the petitioners' lease from time to time.... The evidence merely showed that the landlords and the tenants were mutually satisfied and were likely to keep on together. It added nothing except by way of corroboration to the testimony that they both intended to keep on. Changeable intentions are not an interest in land, and although no doubt such intentions may have added practically to the value of the petitioners' holding, they could not be taken into account in determining what the respondent should pay. They added nothing to the tenants' legal rights, and legal rights are all that must be paid for. Even if such intentions added to the salable value of the lease, the addition would represent a speculation on a chance, not a legal right.

Id. 178 Mass. at 185, 59 N.E. at 765.

This principle was followed in Scully v. United States, 409 F.2d 1061 (10th Cir.1969), cert denied, 396 U.S. 876, 90 S.Ct. 152, 24 L.Ed.2d 134 (1969), which is factually similar to the present case. In Scully, the lessees held property under a series of one year leases. Though the leases did not provide for unconditional renewal, a market for them had developed due in part to the lessor's practice of renewing the leases. The court held that "the lessee of a one year term is not entitled to recover the market value added by a mere expectation that the lease will be renewed." Id. at 1065.

Gannett attempts to distinguish Scully, as well as other cases mentioned here, by arguing that those cases did not involve a lease provision which allowed the lessor to passively acquiesce to yearly extensions. We do not agree with Gannett's distinction. Like Scully, the lease provision in this case merely established the possibility of yearly renewals as opposed to an unfettered grant of right to the lessee. Clearly the lessor maintained the right to not renew the arrangement at the end of the term in any given year; this is the key distinction.

The bright line rule established by these earlier cases was somewhat obscured by the 1973 Supreme Court decision in Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 93 S.Ct. 791 35 L.Ed.2d 1 (1973). In Almota, the Supreme Court reaffirmed that a lessee's expectation in continued lease renewals was not a compensable interest. Id. at 476, 93 S.Ct. at 795. Notwithstanding the acknowledgment of this long-standing rule of law, the court allowed the opposite result--compensating an unrecognized interest--by allowing compensation for the lessee's expectancy in the continued use of an improvement. See id. at 481, 93 S.Ct. at 798 (Rehnquist, J., dissenting).

Justice Rehnquist in a strong dissent demonstrated that the majority's decision was clearly at odds with the long line of cases holding that expectancies are not compensable interests. Id. at 481-82, 93 S.Ct. at 798-99. He emphasized that the loss of "value" alone does not automatically require compensation, rather the "value" must be associated with a cognizable property interest. Id. at 486-87, 93 S.Ct. at 800-01.

Speaking to the protested inconsistency Justice Stewart, writing for the 5-4 majority, distinguished Petty Motor and limited Almota to compensation for improvements:

Unlike Petty Motor, there is no question here of creating a legally cognizable value where none existed, or of compensating a mere incorporeal expectation. The petitioner here has constructed the improvements and seeks only their fair market value.

Almota, 409 U.S. at 476, 93 S.Ct. at 795-96 (footnote omitted).

While the reasoning of the majority opinion may be suspect with regard to compensating improvements, the expressed rule regarding non-compensability for mere expectancies remains. Almota itself makes this distinction clear, as do several opinions written after Almota, which discuss it only in the context of compensating improvements. E.g., United States v. 12.18 Acres of Land, 623 F.2d 131, 132 (10th Cir.1980); Georgia Outdoor Advertising v. City of Waynesville, 690 F.Supp. 452, 456-57 (W.D.N.C.1988). Moreover, two federal court opinions expressly distinguished the narrow Almota exception from the general rule expressed in Petty Motor and Scully. 27,223.21 Acres of Land, 589 F.Supp. at 1126; United States v. 518.77 Acres of Land, 545 F.Supp. 1246, 1247 n. 2 (W.D.Mo.1982). ³

In 27,223.21 Acres of Land, the court reviewed Petty Motor, Scully, and Almota and noted:

Following Almota, a court must carefully distinguish between leasehold improvements and general leasehold interests when determining whether the possibility of lease renewal may be considered part of its value.

27,223.21 Acres of Land, 589 F.Supp. at 1126. As we stated earlier, this is not a case involving valuation of improvements.

The majority of state courts deciding this issue have also determined that an expectation in the continuation of a lease is not a compensable property interest. E.g., Stroh v. Alaska State Housing Authority, 459 P.2d 480 (Alaska 1968); Pittsburgh Outdoor Advertising Co., 440 Pa. 321, 272 A.2d 163 (1970). See generally Annotation, Eminent Domain: Measure and Elements of Lessee's Compensation for Condemnor's Taking or Damaging of Leasehold, 17 A.L.R.4th 337, 461-62 (1982) (summary of several state, as well as federal cases). One of the better recent restatements of the rule is found in Stroh. In that case the lessee argued that although he possessed a five year lease, his uncontroverted testimony regarding conversations he had with his landlord about a continuing leasing arrangement demonstrated a probability that the lease would be renewed. The court responded:

A tenant's right of renewal of a lease refers to a legal right, and this exists only when the lease expressly grants to the tenant the option to renew the lease at...